State of Ill. ex rel. Hartigan v. Panhandle Eastern Pipe Line Co.

• Decision Date: 18 July 1988
• Docket Number: No. 85-2601,85-2601
• Citation: 852 F.2d 891
• Parties: 1988-2 Trade Cases 68,150 STATE OF ILLINOIS ex rel. Neil F. HARTIGAN, Attorney General of the State of Illinois, in its proprietary capacity, in its parens patriae capacity, and in its representative capacity, Plaintiff-Appellee, v. PANHANDLE EASTERN PIPE LINE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 891

852 F.2d 891

1988-2 Trade Cases 68,150

STATE OF ILLINOIS ex rel. Neil F. HARTIGAN, Attorney General of the State of Illinois, in its proprietary capacity, in its parens patriae capacity, and in its representative capacity, Plaintiff-Appellee, v. PANHANDLE EASTERN PIPE LINE COMPANY, Defendant-Appellant.

No. 85-2601.

United States Court of Appeals Seventh Circuit.

Argued Feb. 28, 1986.

Decided Jan. 22, 1988.

Rehearing En Banc May 26, 1988.

Decided July 18, 1988.

Paul H. LaRue, Chadwell & Kayser, Ltd., Chicago, Ill., for defendant-appellant.

Richard L. Miller, Raymond J. Smith, Burke & Smith, Chtd., Chicago, Ill., for plaintiff-appellee.

Before BAUER, Chief Judge, CUMMINGS, CUDAHY, POSNER, COFFEY, FLAUM, RIPPLE, MANION, and KANNE, Circuit Judges, and FAIRCHILD, Senior Circuit Judge. ^*

POSNER, Circuit Judge.

Central Illinois Light Company (CILCO) is a publicly regulated retail distributor of natural gas. It bought natural gas from Panhandle Eastern Pipe Line Company at prices allegedly inflated because of violations of the antitrust laws by Panhandle, and resold the gas to residential and industrial consumers. In its resales to residential consumers, CILCO passed on the entire overcharge in the form of higher rates. In 1984 the State of Illinois brought this federal antitrust suit on behalf of CILCO's customers against Panhandle--which moved to dismiss the suit as barred by the "indirect purchasers" rule of Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 88 S.Ct. 2224, 20 L.Ed.2d 1231 (1968), and Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977). The district court denied the motion, but certified its order of dismissal for an immediate appeal under 28 U.S.C. Sec. 1292(b), and we agreed to hear the appeal. A panel of this court reversed the district court and directed it to dismiss the complaint. 839 F.2d 1206 (7th Cir.1988). The full court granted rehearing en banc to decide whether regulatory cost-plus pricing can ever be excepted from the rule that "indirect purchasers" (CILCO's customers are indirect purchasers from Panhandle, CILCO being the direct purchaser) are barred from obtaining antitrust damages from their indirect seller. While the appeal was pending in this court, the district judge conducted a 13-week trial on liability, but he has deferred making a decision until we decide the appeal.

In Hanover Shoe the Supreme Court held that it is not a defense to an antitrust damages action that a buyer forced to pay a higher price because of the seller's antitrust violation passed on the cost of the violation to the buyer's customers (the seller's indirect purchasers) by raising his prices to them, unless the buyer had a cost-plus contract with these customers. Illinois Brick announced a corollary to Hanover Shoe: the indirect purchaser cannot sue to recover the part of the overcharge that the buyer passed on to him. The Court again recognized an exception for the cost-plus contract, noting that it insulates the direct purchaser from "any decrease in its sales as a result of attempting to pass on the overcharge, because its customer is committed to buying a fixed quantity regardless of price." Id. at 736, 97 S.Ct. at 2069-70. Fastening on the words "fixed quantity," the panel majority in this case held that the cost-plus exception is never available when the indirect purchasers are free to vary the quantity they buy from the direct purchaser. The question for decision today is whether the exception is as confined as the panel thought.

The panel's opinion was not the first to read the exception so narrowly. See Mid-West Paper Products Co. v. Continental Group, Inc., 596 F.2d 573, 577 n. 9, 580 (3d Cir.1979); In re Midwest Milk Monopolization Litigation, 730 F.2d 528, 533 (8th Cir.1984); Lefrak v. Arabian American Oil Co., 487 F.Supp. 808, 819 (E.D.N.Y.1980); cf. Arizona v. Shamrock Foods Co., 729 F.2d 1208, 1212 n. 2 (9th Cir.1984); but see In re Uranium Antitrust Litigation, 552 F.Supp. 518 (N.D.Ill.1982). And its reading was followed in In re Wyoming Tight Sands Antitrust Cases, No. 85-2349-S (D.Kan. May 4, 1988). Yet it was not dictated by precedent. Not only had the prior cases all involved privately negotiated cost-plus contracts rather than cost-plus contractual provisions required by public utility regulation, but there was no reason to believe that the reference to "fixed quantity" in the Supreme Court's opinion in Illinois Brick was intended to govern cases so remote from the actual arrangements under scrutiny in that case. The case did not involve a fixed-quantity contract; indeed, it did not involve a cost-plus contract, but merely an argument (which the Court rejected, see 431 U.S. at 744, 97 S.Ct. at 2074) that a buyer's practice of rule-of-thumb cost-plus pricing should be enough to allow his customers to sue the seller. Certainly there is no indication that by using the words "fixed quantity" the Supreme Court meant to address the issue of the status of regulatory cost-plus pricing. We do a disservice to the Court by wrenching its words out of context and giving them a talismanic significance; we make language a trap rather than a mode of communication. The Supreme Court has never adverted to the issue involved in the present case, and we must consider that issue in relation to the rationale of Illinois Brick rather than to isolated phrases in the Court's opinion. If we are to play the language game to which Panhandle invites us, moreover, then we must consider isolated phrases in other Supreme Court opinions, notably the majority opinion in Blue Shield of Virginia v. McCready, 457 U.S. 465, 474-75, 102 S.Ct. 2540, 2545-46, 73 L.Ed.2d 149 (1982), where the concern behind Hanover Shoe and Illinois Brick is described as "the risk of duplicative recovery engendered by allowing every person along a chain of distribution to claim damages arising from a single transaction that violated the antitrust laws." There is, as we shall see, no such risk in this case, at least so far as the residential purchasers from CILCO are concerned; and it is only they who have, in our view, a persuasive claim to be entitled to sue.

Although several district courts have rejected an exception for cost-plus rate regulation, see (besides Tight Sands ) Go-Tane Service Stations, Inc. v. Ashland Oil, Inc., 508 F.Supp. 200, 204 (N.D.Ill.1981); City of Cleveland v. Cleveland Electric, Illuminating Co., 538 F.Supp. 1320, 1323-27 (N.D.Ohio 1980); U.S. Oil Co. v. Koch Refining Co., 518 F.Supp. 957, 962-63 (E.D.Wis.1981), the cases are distinguishable; and in the case with facts most like those of the present case the court held that indirect purchasers could sue because public utility regulation had created "a straight cost passthrough." In re New Mexico Natural Gas Antitrust Litigation, 1982-1 Trade Cases p 64,685, at p. 73,722 (D.N.Mex.1982). Cf. County of Oakland v. City of Detroit, 628 F.Supp. 610, 613 (E.D.Mich.1986); Illinois v. Borg, Inc., 548 F.Supp. 972, 975-76 (N.D.Ill.1982). An additional wrinkle in the New Mexico Natural Gas case, however, was that the direct purchasers were in cahoots with the defendants; this was an independent ground for allowing the indirect purchasers to sue.

It is possible to allow indirect purchasers to sue in a case such as the present one without embracing the ill-defined "functional equivalent" approach of In re Beef Industry Antitrust Litigation, 600 F.2d 1148 (5th Cir.1979); see also, e.g., Gulf Oil Corp. v. Dyke, 734 F.2d 797, 809 (T.E.C.A.1984). That approach--effectively criticized in In re Midwest Milk Monopolization Litigation, 529 F.Supp. 1326, 1337-38 (W.D.Mo.1982), aff'd, 730 F.2d 528 (8th Cir.1984); Comment, A Legal and Economic Analysis of the Cost-Plus Contract Exception in Hanover Shoe and Illinois Brick, 47 U.Chi.L.Rev. 743, 756-70 (1980), cf. Abbotts Dairies Division of Fairmont Foods v. Butz, 584 F.2d 12, 16-17 (3d Cir.1978), and found to be inapplicable to conditions in the beef industry itself in In re Beef Industry Antitrust Litigation, 710 F.2d 216, 219-20 (5th Cir.1983)--requires elaborate analysis of the incidence of a cost increase, which is precisely the analysis that the Court disparaged in Illinois Brick. Our approach does not require this. We have formal cost-plus pricing in this case rather than its "functional equivalent." We have formal cost-plus pricing, and more: a contract that required 100 percent passing on, and an acknowledgment of 100 percent passing on in every kilowatt hour resold to CILCO's residential consumers.

To determine whether (or to what extent) this case is within the rule of Illinois Brick, we must consider the reasons for confining the right to sue to the direct purchaser; for it is the reasons behind a rule that determine its scope. First, because the direct purchaser is closer to the violation and hence more likely to discover it, we want to make sure that he has a strong incentive to bring the violator to book, and we do this by holding out to him the prospect of recovering the entire damages caused by the violation if he wins the suit. Second, it is difficult to apportion damages between direct and indirect purchasers by the methods of litigation. A direct purchaser who finds himself paying a higher price for inputs would love to pass on all of the additional cost to his customers in the form of a higher price, but he cannot do so, because a price that much higher will so reduce the demand for his product that his profits will fall unacceptably. (If the higher price were optimal, the firm would have raised its price without waiting for its costs to increase.) The optimal adjustment by an unregulated firm to the increased cost of the input will always be a price increase smaller than the increase in input cost, and this means that the increased cost will be divided between the two tiers, the direct and indirect purchasers--but in what proportions will often be...